SBR syllabus

Cow's Property Measurement Issue

Cow can choose between the cost model and the fair value model for property measurement under IAS 40 Investment Property. They must apply their choice consistently and change to the fair value model only if it provides more reliable information. Any policy change should be applied retrospectively according to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

However, Cow is not following IAS 40 correctly. They apply the fair value model to some European properties but not all. This seems to inflate PBIT and meet bank covenants. It's unclear if impairment losses were recognised on properties measured under the cost model, raising concerns about their Finance Director's behavior.

Moreover, they're incorrectly adopting IAS 8 prospectively instead of retrospectively for the fair value model. This likely boosts this year's profit, leading to a cumulative gain. These errors are concerning and violate the principle of professional competence in the Ethical Code.

There's a suspicion that these errors are intentional to inflate PBIT and meet bank covenants. This would be dishonest, lacking integrity and objectivity, which is a more severe ethical breach than incompetence.

The financial controller should discuss this with the Finance Director, emphasizing consistent property measurement, impairment tests, and retrospective policy changes. If issues persist, they might seek advice from third parties like independent directors, internal audit, or the auditor. Legal advice and professional body consultation are also options. As a last resort, resigning may be necessary to avoid involvement in unethical financial manipulation.